ACCT 3021 : Quiz 8 Solution
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Using the data in the Option 2 Spreadsheet(linked at the bottom of the page), perform the accounting requiredfor the acquisition of Little, Inc. by Big, Inc. This is an 80%acquisition, where the book value of the assets acquired is lessthan the acquisition price. Within the worksheet, you are to:
1. Select an accounting method (either cost or equity) andexplain why you selected this method
2. Perform the required journal entries
3. Complete the consolidation worksheet
4. Prepare the consolidated balance sheet in good form
| Big CompanyBalance Sheet | Which accountingmethod is most appropriate for representing an investment of thistype? | Prepare Elimination Entriesfor Stock Acquisition | ||||||||
| Assets, Liabilities & Equities | Book Value | Account | DR | CR | ||||||
| Cash | $2,100,000 | |||||||||
| AR | $10,000 | |||||||||
| Inventory | $200,000 | |||||||||
| Land | $40,000 | |||||||||
| PP&E | $400,000 | |||||||||
| Accumulated Depreciation | -$150,000 | |||||||||
| Patent | $0 | |||||||||
| Total Assets | $2,600,000 | Prepare thejournal entries for a 80% Asset Acquisition (using Big CompanyCash) | ||||||||
| AP | $100,000 | |||||||||
| Common Stock ($10 par) | $450,000 | Account | DR | CR | ||||||
| Additional Paid In Capital | $600,000 | |||||||||
| Retained Earnings | $1,450,000 | |||||||||
| Total Liabilities &Equity | $2,600,000 | Prepare thejournal entries for a 80% Acquisition by issuing 10,000 shares ofBig Company Stock | Big Company Balance Sheet (Consolidated) | |||||||
| Little Company BalanceSheet | Assets, Liabilities & Equities | |||||||||
| Assets, Liabilities & Equities | Book Value | Account | DR | CR | Cash | |||||
| Cash | $35,000 | Investment in Little | AR | |||||||
| AR | $10,000 | Common Stock | Inventory | |||||||
| Inventory | $65,000 | Additional Paid In Capital | Land | |||||||
| Land | $40,000 | Allocation of Excess Schedule | PP&E (net) | |||||||
| PP&E | $400,000 | Accumulated Depreciation | ||||||||
| Accumulated Depreciation | -$150,000 | Goodwill | ||||||||
| Patent | $0 | Patent | ||||||||
| Total Assets | $400,000 | Total Assets | ||||||||
| AP | $100,000 | AP | ||||||||
| Common Stock | $100,000 | Common Stock ($10 par) | ||||||||
| Additional Paid In Capital | $50,000 | Additional Paid In Capital | ||||||||
| Retained Earnings | $150,000 | Retained Earnings | ||||||||
| Total Liabilities &Equity | $400,000 | NCI | ||||||||
| Total Liabilities & Equity | ||||||||||
| Assumethat all noncash assets have a Fair Value that is 10% greater thanBook Value | ||||||||||
| Chapman Company obtains 100 percent of Abernethy Companyâs stock on January 1, 2014. As of that date, Abernethy has the following trial balance: |
| Debit | Credit | ||||
| Accounts payable | $ | 57,300 | |||
| Accounts receivable | $ | 42,200 | |||
| Additional paid-in capital | 50,000 | ||||
| Buildings (net) (4-year life) | 214,000 | ||||
| Cash and short-term investments | 82,250 | ||||
| Common stock | 250,000 | ||||
| Equipment (net) (5-year life) | 375,000 | ||||
| Inventory | 90,500 | ||||
| Land | 117,000 | ||||
| Long-term liabilities (mature 12/31/17) | 170,000 | ||||
| Retained earnings, 1/1/14 | 409,650 | ||||
| Supplies | 16,000 | ||||
| Totals | $ | 936,950 | $ | 936,950 | |
| During 2014, Abernethy reported net income of $117,500 while declaring and paying dividends of $15,000. During 2015, Abernethy reported net income of $171,250 while declaring and paying dividends of $55,000. |
| Assume that Chapman Company acquired Abernethyâs common stock for $860,500 in cash. As of January 1, 2014, Abernethyâs land had a fair value of $132,000, its buildings were valued at $287,600, and its equipment was appraised at $352,500. Chapman uses the equity method for this investment. |
| Prepare consolidation worksheet entries for December 31, 2014, and December 31, 2015. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) There should be ten entries and I solved the first few:
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Parson Company acquired an 80 percent interest in Syber Companyon January 1, 2017. Any portion of Syber's business fair value inexcess of its corresponding book value was assigned to trademarks.This intangible asset has subsequently undergone annualamortization based on a 15-year life. Over the past two years,regular intra-entity inventory sales transpired between the twocompanies. No payment has yet been made on the latest transfer. Alldividends are paid in the same period as declared.
The individual financial statements for the two companies aswell as consolidated totals for 2018 follow:
| Parson Company | Syber Company | Consolidated Totals | |||||||||
| Sales | $ | (900,000 | ) | $ | (700,000 | ) | $ | (1,460,000 | ) | ||
| Cost of goods sold | 550,000 | 450,000 | 870,000 | ||||||||
| Operating expenses | 120,000 | 130,000 | 253,000 | ||||||||
| Income of Syber | (89,800 | ) | 0 | 0 | |||||||
| Separate company net income | $ | (319,800 | ) | $ | (120,000 | ) | |||||
| Consolidated net income | $ | (337,000 | ) | ||||||||
| Net income attributable tononcontrolling interest | 17,200 | ||||||||||
| Net income attributable toParson Company | $ | (319,800 | ) | ||||||||
| Retained earnings, 1/1/18 | $ | (626,600 | ) | $ | (310,000 | ) | $ | (626,600 | ) | ||
| Net income (above) | (319,800 | ) | (120,000 | ) | (319,800 | ) | |||||
| Dividends declared | 80,000 | 40,000 | 80,000 | ||||||||
| Retained earnings, 12/31/18 | $ | (866,400 | ) | $ | (390,000 | ) | $ | (866,400 | ) | ||
| Cash and receivables | $ | 398,000 | $ | 90,000 | $ | 464,000 | |||||
| Inventory | 200,000 | 180,000 | 365,500 | ||||||||
| Investment in Syber Company | 398,400 | 0 | 0 | ||||||||
| Land, buildings, andequipment | 400,000 | 290,000 | 690,000 | ||||||||
| Trademarks | 0 | 0 | 32,500 | ||||||||
| Total assets | $ | 1,396,400 | $ | 560,000 | $ | 1,552,000 | |||||
| Liabilities | $ | (320,000 | ) | $ | (80,000 | ) | $ | (378,900 | ) | ||
| Common stock | (170,000 | ) | (90,000 | ) | (170,000 | ) | |||||
| Additional paid-in capital | (40,000 | ) | 0 | (40,000 | ) | ||||||
| Noncontrolling interest inSyber | 0 | 0 | (96,700 | ) | |||||||
| Retained earnings (above) | (866,400 | ) | (390,000 | ) | (866,400 | ) | |||||
| Total liabilities andequities | $ | (1,396,400 | ) | $ | (560,000 | ) | $ | (1,552,000 | ) | ||
What method does Parson use to account for its investment inSyber?
What is the balance of the intra-entity inventory gross profitdeferred at the end of the current period?
What amount was originally allocated to the trademarks?
What is the amount of the current year intra-entity inventorysales?
Were the intra-entity inventory sales made upstream ordownstream?
What is the balance of the intra-entity liability at the end ofthe current year?
What amount of intra-entity gross profit was deferred from thepreceding period and recognized in the current period?
What was the ending Noncontrolling Interest in Syber Companycomputed?
With a tax rate of 40 percent, what income tax journal entry isrecorded if the companies prepare a consolidated tax return?
With a tax rate of 40 percent, what income tax journal entry isrecorded if these two companies prepare separate tax returns?